PMB Technology Berhad (KLSE:PMBTECH) seems to be using debt quite wisely
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that PMB Berhad Technology (KLSE:PMBTECH) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for PMB Technology Berhad
What is PMB Technology Berhad’s debt?
The image below, which you can click on for more details, shows that as of March 2022, PMB Technology Berhad had a debt of RM556.9 million, up from RM522.3 million in one year. However, he has RM104.1 million in cash to offset this, resulting in a net debt of around RM452.9 million.
How strong is PMB Technology Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that PMB Technology Berhad had liabilities of RM495.6 million due within 12 months and liabilities of RM276.2 million due beyond. In return, he had RM104.1 million in cash and RM232.1 million in receivables due within 12 months. Thus, its liabilities total RM435.7 million more than the combination of its cash and short-term receivables.
Given that publicly traded PMB Technology Berhad shares are worth a total of RM3.47 billion, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
PMB Technology Berhad has a low net debt to EBITDA ratio of just 1.5. And its EBIT covers its interest charges 14.4 times. So we’re pretty relaxed about his super-conservative use of debt. What is even more impressive is that PMB Technology Berhad increased its EBIT by 517% year-over-year. If sustained, this growth will make debt even more manageable in years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since PMB Technology Berhad will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, PMB Technology Berhad has burned a lot of money. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.
Our point of view
PMB Technology Berhad’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But the harsh truth is that we are concerned about its conversion from EBIT to free cash flow. All in all, it looks like PMB Technology Berhad can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that PMB Technology Berhad presents 3 warning signs in our investment analysis and 1 of them is a little unpleasant…
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.